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Labor markets and institutions

Institutions have important consequences for the performance of households, companies, governments, and entire markets—they determine the welfare of nations. Contributions to this subject area explore the underlying mechanisms and the politico-economic determinants of such structures. Many provide background analyses that offer evidence on how new institutions and policies would affect labor markets.

When applied to the most responsive segments of
the labor market, tax policy can increase lifetime earnings and
employment

With aging populations and increased demands on
government revenue, countries need to boost employment and earnings. Tax
policy should focus on labor market entry and retirement. Those are the
points where labor supply is most responsive to tax incentives, which can
enhance the flow into work of people leaving school and women with young
children and can prolong employment among older workers. Human capital
policy has a complementary role in improving the payoff to work and ensuring
that earnings hold up longer over a lifetime.

The effect of overtime, payroll taxes, and labor
policies and costs on companies’ product output and countries’ GDP

Higher labor costs (higher wage rates and employee
benefits) make workers better off, but they can reduce companies’ profits,
the number of jobs, and the hours each person works. Overtime pay, hiring
subsidies, the minimum wage, and payroll taxes are just a few of the
policies that affect labor costs. Policies that increase labor costs can
substantially affect both employment and hours, in individual companies as
well as the overall economy.

Productive entrepreneurs can invigorate the
economy by creating jobs and new technologies, and increasing
productivity.

Entrepreneurs are a rare species. Even in
innovation-driven economies, only 1–2% of the work force starts a business
in any given year. Yet entrepreneurs, particularly innovative entrepreneurs,
are vital to the competitiveness of the economy. The gains of
entrepreneurship are only realized, however, if the business environment is
receptive to innovation. In addition, policymakers need to prepare for the
potential job losses that can occur in the medium term through “creative
destruction” as entrepreneurs strive for increased productivity.

Policymakers need to find the right balance
between protecting workers and promoting efficient resource allocation and
productivity growth

Laws on hiring and firing are intended to protect
workers from unfair behavior by employers, to counter imperfections in
financial markets that limit workers’ ability to insure themselves against
job loss, and to preserve firm-specific human capital. But by imposing costs
on firms’ adaptation to changes in demand and technology, employment
protection legislation may reduce not only job destruction but also job
creation, hindering the efficient allocation of labor and productivity
growth.

The challenge of unemployment benefits is to
protect workers while minimizing undesirable side effects

All developed economies have unemployment benefit
programs to protect workers against major income losses during spells of
unemployment. By enabling unemployed workers to meet basic consumption
needs, the programs protect workers from having to sell their assets or
accept jobs below their qualifications. The programs also help stabilize the
economy during recessions. If benefits are too generous, however, the
programs can lengthen unemployment and raise the unemployment rate. The
policy challenge is to protect workers while minimizing undesirable side
effects.

Despite major efforts at equal pay legislation,
gender pay inequality still exists in the developed economies. How can this
be put right?

Despite equal pay legislation dating back 50
years, American women still earn 22% less than their male counterparts. In
the UK, with its Equal Pay Act of 1970, and France, which legislated in
1972, the gap is 21% and 17% respectively, and in Australia it remains
around 17%. Interestingly, the gender pay gap is relatively small for the
young but increases as men and women grow older. Similarly, it is large when
comparing married men and women, but smaller for singles. Just what can
explain these wage patterns? And what can governments do to speed up wage
convergence to close the gender pay gap? Clearly, the gender pay gap
continues to be an important policy issue.

How effective are online methods of worker
recruitment and job search?

Since the internet’s earliest days, firms and
workers have used various online methods to advertise and find jobs. Until
recently there has been little evidence that any internet-based tool has had
a measurable effect on job search or recruitment outcomes. However, recent
studies, and the growing use of social networking as a business tool,
suggest workers and firms are at last developing ways to use the internet as
an effective matchmaking tool. In addition, job boards are also emerging as
important for the statistical study of labor markets, yielding useful data
for firms, workers, and policymakers.